The Importance of the Japanese Yen and Its Relation to the US Dollar

Technical analysis of the yen in today's market.

MINYANVILLE ORIGINAL As this bull market continues to mature, it's not a bad time to consider ways to diversify away from strictly equity trades and into ancillary markets that hold promise. One that I have monitored for a very long time is the Japanese yen and its relation to the US dollar. In many ways, the US dollar is taking over the role of the go-to currency in times of trouble, which was what the yen has been for more than a decade.

There are many fundamental reasons to think that the Japanese currency will have to fall over time. First of all, Japan remains primarily an exporting nation and requires a lower currency rate to stimulate foreign product demand. This has resulted in the Japanese central bank becoming a natural seller in the market if and when the yen rises. In a way, you can think of this as similar to the Bernanke put with respect to keeping a lid on the yen.

Long term, the strength of the yen has been prevalent since the 1970s, which is one of the longest running bull markets around. You never want to short a bull market, but you do want to short a long running bull market when it is done and that is what the yen appears to be now. The yen has climb to heights that are truly counterintuitive since Japan faces challenges that would normally suggest extreme currency weakness.

You can see the shift taking place in qualified trends by looking at the Trading Cube, which shows that both the short and intermediate term trends have transitioned from bullish to bearish and in a confirmed manner.

Short term trends can lead to intermediate term trend transitions which can themselves may lead to long term trend transitions. The Trading Cube shows this evolution in process. On the monthly chart, you can see this trend graphically developing.

At this juncture, the long-term chart remains bullish but you can see the changes that are developing. A classical TA trendline higher has already broken -- but more importantly, the chart is witnessing expanding volume on lower price movement and that has only happened over the past six to eight months. These are tell-tale signs of distribution and a roll over in the chart and, as was shown on the Trading Cube, it has already transitioned to bearish on the shorter-term time frames.

Below is the intermediate term time frame chart. Note that this latest push back higher creates a much better reward to risk ratio for anyone wanting to short the currency and is even more visible here on the weekly chart. The current price is at resistance and this may be it for the attempt to climb back to the highs from last year and what were all-time highs for the currency when measured against the US dollar.

The risk -- and there is always a risk -- is that the swing point high on the weekly chart is overrun creating another AB=CD projection back to the all-time highs. That price point is about $2 higher than the current price so risk can be limited to just over that area. Although that doesn't appear likely technically, it is possible and defines the risk for the trade. The higher probability outcome, however, is for price to eventually work lower and rest the $122 area which, if it breaks, puts the prior lows from March back in play and potentially even more.
This is not a short term trading idea although scaling in and out of the trade over time on price expansion and contraction makes a lot of sense especially if you choose to use the leveraged ProShares Ultrashort Yen (YCS) trading vehicle, which resets daily and can compound significantly if consecutive days of rising or falling price print. A more conservative way to trade this is simply shorting the Rydex Currencyshares Japanese Yen Trust (FXY) and leaving leverage out of the equation.

This is one technical opportunity to trade "outside" of equities with a high probability setup over the intermediate to long-term time frame.